Turkey Wake up call: Macro and Political News, 20th February

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distributor of this analysis and has not introduced any material changes to the content of this analysis or any recommendation included herein.

Wake – up call

BIST lost 0.32% yesterday as the weakness in banks despite the Central Bank’s 50bps policy rate cut in yesterday’s MPC meeting weighed on the broader market. Index had a positive start and stayed strong until around noontime. President Erdogan’s warnings about Syria reminded of geopolitical risks again and led to trimming of earlier gains. Afternoon trading saw further weakness with some partial rebound in the last hour. Banking index was down 1.50% amid pressure on YKBNK and AKBNK while VAKBN held up better. EREGL, MGROS, KRDMD, GUBRF, ULKER, and HEKTS were among the weakest non-financials while the gains in TTKOM, TCELL, ASELS, FROTO, TOASO, KOZAL, ENJSA, and TUPRS supported the headline index. Today, our local macro agenda showcases the February'20 Consumer Confidence Index compiled by TurkStat at 10AM local. The index had inched up 0.1% on a sequential basis to 58.8 in January. Responding to a question about Idlib/Syria conflict in his press meeting last night, Pentagon spokesperson Jonathan Hoffman said the United States believes that Russia and Turkey have come “very close” to a more extensive conflict in the area and hopes that they will find a solution to avoid it. Given rising perceptions on regional risks as well as some slide in lira (USDTRY now at 6.0892 vs 6.0846 at yesterday’s close), BIST seems off to a slight negative start this morning. U.S. futures are down a few points while Asian equity markets present a mixed picture.
Macro and Political News:
(-) Erdogan: Turkish operation in Idlib, NW Syria “a matter of time”… President Erdogan said Wednesday that Turkey will not hesitate to take care of its security concerns regarding the ongoing crisis in Idlib by itself if other countries in the region fail to abide by the Sochi agreement. Speaking at the ruling Justice and Development (AK) Party’s parliamentary group meeting, President Erdogan said Turkey has completed preparations to implement its own operation plan regarding Idlib, where the Bashar Assad regime and Russian forces incessantly attack civilian infrastructure despite previous agreements. Erdogan underscored that the operation may happen suddenly one night, referring to three cross-border operations targeting terrorists in northern Syria. He stressed that the Idlib operation is a matter of time. Reiterating Turkey’s determination to prevent another migrant crisis, the president said Turkey does not intend to take on the burden created as a result of regional developments. He said Turkey is determined at all costs to turn Idlib into a safe haven for the sake of Turkey and the people of the region. The president continued by adding that none of the meetings with Russia have produced favourable results, and even though they will continue to hold talks, the two countries are "miles away" from reaching a mutual conclusion. Erdogan highlighted that there are few days left for the regime to stop its aggression in Idlib and retreat to the areas determined by the Sochi deal, underlining that these are Turkey’s last warnings.
(=) Defense Minister: Turkey expects parties in Idlib to follow Sochi deal… Hulisi Akar, Defense Minister, said that Turkey expects parties in Syria’s northwestern Idlib province to live up to their commitments under the Sochi deal with Russia. Akar told reporters that withdrawing from observation posts in Idlib is out of the question. Akar said they would retaliate against any attack on Turkish observation posts. He underscored that Turkey expects the parties in Idlib to rapidly comply with their commitments under the Sochi deal such that a cease-fire can be implemented. Akar added that the situation in Idlib had a military, security and defense dimension, adding that the humanitarian aspect should be considered as well.
(=/+) Russia ready to continue work on Idlib with Turkey… Foreign Minister Sergey Lavrov said on Wednesday that Russia is ready to continue talks with Turkey at any level on the tense situation in Syria’s northwestern province of Idlib. The two-day consultations between the delegations of the countries, held in Moscow this week, ended without a conclusion, Lavrov said, speaking at a news conference in Moscow. He said, they have not put forward any new conditions at the talks with Turkey and added that they believe they need to implement all that their leaders had agreed on. Lavrov called the condition to separate the opposition from terrorists a key agreement on Idlib, adding that terrorists cannot be part of the cease-fire. He stressed that another point Russia insists on is to withdraw all the heavy weapons and militants form the demilitarized zone, situated in the Idlib de-escalation zone. He also argued that Damascus took control over M4 and M5 highways, in line with Putin and Erdogan's agreement on Idlib. Lavrov stressed that no one has ever promised the terrorists that they will be safe in the Idlib zone. He concluded that Russia is ready to work at any level, including at the highest level, adding that they have not seen any instructions to prepare the presidential meeting.
(=) Turkey rejects Russia’s Idlib plan… The second round of talks between Turkey and Russia remained inconclusive after Turkish officials said they were unsatisfied with a Russian proposal for northwest Syria’s Idlib. The talks were prompted by the recent escalation in Idlib where Bashar Assad forces killed 13 Turkish soldiers. Turkey condemned Russia’s policy of wanting to take over Idlib territory but not care for its people. During the two-day closed-door talks in Moscow, the Russian delegation, led by the presidential envoy for Syria, Sergey Vershinin, and the Turkish delegation, headed by Deputy Foreign Minister Sedat Onal, tried to find a solution to the latest outbreak of violence in the Idlib de-escalation zone. The Russian side proposed a map that moves the Sochi deal borders north of the strategic M4 and M5 highways. The map, which puts 60% of Idlib under regime control and envisages the relocation of Turkish observation posts to the north, was rejected by the Turkish delegation. The Russian delegation's claim that Hmeimim airbase was being attacked, was similarly rejected by the Turkish delegation, which pointed out that Hmeimim is southwest of Idlib while the regime’s attacks take place in Idlib’s southeast, constituting a wide gap between the two points. Turkey is determined not to roll back the Sochi deal and to take the necessary steps to end the Assad regime’s aggression.
Now, all eyes are on the third round of talks scheduled to take place in Ankara next week. Reports said the two countries’ presidents may meet if no result comes out of the third round of talks. As President Erdogan’s deadline given to the regime for withdrawing behind the Sochi deal borders draws near, reports also suggested that a trilateral meeting between Turkey, Russia and Iran could be held in the Iranian capital Tehran on March 5. But the date was subject to change according to the developments in Idlib.
Backed by heavy Russian airstrikes, Syrian regime forces have been fighting since the start of the year to recapture the Aleppo countryside and parts of neighbouring Idlib, the last opposition stronghold in the country. The advances have sent hundreds of thousands of Syrian civilians fleeing toward the border with Turkey in the biggest single displacement of the war.
(=) The CBRT delivers 6th consecutive rate cut… The CBRT decided to lower its benchmark one-week repo interest rate by 50bps to 10.75%. The Monetary Policy Committee (MPC) announced Wednesday that the decision marks a sixth consecutive cut in an aggressive easing cycle aimed at boosting economic growth. The MPC said in a statement that recent data indicate that recovery in economic activity continues while sectoral diffusion of economic activity continues to improve. The Bank also noted that despite signs of recovery, investment and employment remain weak, adding that the Turkish economy’s recovery is expected to be sustained with the help of the ongoing disinflation process and improvement in financial conditions amid net exports’ declining contribution to economic growth.
The Bank stated that the weakness in global economic activity and low levels of global inflation strengthen expectations regarding the continuation of expansionary monetary policies in advanced economies, while highlighting that recently elevated uncertainties regarding global economic outlook lead to volatility in the demand for emerging market assets and the risk appetite. The MPC reiterated that the current monetary policy stance remains consistent with the projected disinflation path, and that it will continue to track the impacts of geopolitical developments and the coronavirus outbreak on capital flows, international trade and commodity prices.
The 50bp cut and broadly unchanged policy guidance (with few marginal tweaks to the cautious side) support the view that monetary easing will continue in the remainder of this year. Furthermore, policymakers continue to underline the need for lower rates and so we still expect the CBRT to continue its easing cycle with the next cut of 50bps next month.
Going forward, we expect a single-digit policy rate as early as July, and we project the policy rate at 9.5% at the end of 2020. If growth disappoints and/or geopolitical risks subside in a sustained way, the CBRT could deliver more. On the contrary, if a sharp worsening in external balances were to hit the lira, the bank may come up with a more cautious stance.
(+) External debt of Turkish private sector down at end of 2019… The outstanding short and long-term debts of Turkey’s private sector fell last December. The private sector’s short-term overseas loans, excluding trade credits, were USD9.5bn in December, down USD5.8bn compared to the end of 2018. Liabilities of financial institutions were 78.8% of all short-term loans, according to the CBRT data print. On the long-term side, the private sector’s external loans totalled USD191.5bn last December, down USD17.2bn against the end of 2018. Nonfinancial institution liabilities constituted 53.8% of long-term external loans. Most of the long-term loans, 61.2%, were in U.S. dollars, followed by the euro and Turkish lira at 33.4% and 3.8%, respectively. On a basis of remaining maturity at the end of December, the private sector’s total outstanding loans received from abroad amounted to USD50.7bn in principal repayments over the following 12 months.
(=) Erdogan reiterates USD100bn trade target between Ankara and Washington… President Erdogan said Wednesday that Turkey and the U.S. have decided to keep their target of reaching USD100bn in trade volume separate from other problems between the two countries. Recall, the decision was agreed upon in a recent call with the U.S. President Donald Trump, Erdogan said in the capital Ankara. Erdogan added that the trade cooperation with the U.S. will hopefully make a significant contribution to Turkey’s efforts to establish future economic infrastructure, including high-tech.
(+) Borsa Istanbul to lift 2 zeros from indices, preparing for IPO… The Borsa Istanbul Stock Exchange (BIST) said Wednesday it will erase two zeros from its indices on April 27. BIST said in a statement that it has been decided to divide TL based Price and Return stock indices by 100. The stock exchange will test this move in several phases. The planned go-live date is April 27, 2020 and the index values will continue to be shown in two decimal places. Also, the stock exchange noted that contract sizes will be decreased to 10 from 100 and price ticks for futures will be increased to 0.25 from 0.025. The removal of the two zeros will make no change in stock prices. Changing the index's divisor will have an effect such as a bonus capital increase in equities. If two zeros are omitted from the index, a technical correction will be made without a change in market value.
Moreover, BIST General Manager Hakan Atilla on Wednesday told reporters that they are striving to lift the ban on short sales. He noted that there will be regulation in stocks with very low free float rate, indicating that they are working to attract more domestic investors with new instruments to be on the agenda. Atilla also underlined that transactions worth an average of TRY200mn take place during the evening session, adding that they are satisfied with this course and that the number of investors in mutual funds is 3 million. Atilla stated that trading volumes have doubled compared to last year. According to Atilla, they are also working to make the loan market more active.
Last but not the least, Atilla underscored that they will be ready for the initial public offering (IPO) of the stock exchange soon. The IPO, which has been on the agenda since 2014, will be completed by the end of the year, while the removal of the zeros is on the agenda for the first time in 23 years. Market has been circulating that the size of the IPO could be around USD400mn to USD500mn if a one-third share is offered to the public. Significant foreign investor demand could be expected thanks to the BIST group's profitable business model and high dividend yield as the net profit soared to TRY1.17 bn in 2018 from TRY419mn in 2017 with total revenues of TRY1.53bn.

Sector and Company News:
ENKAI bought 230k lots of its own shares with TRY6.79-6.80 price range per share.
(=) TKFEN is to release its 4Q19 earnings on 20th of February on Thursday. Research Turkey consensus: TL 3.450 mn revenues, TL 368 mn EBITDA and TL 264 mn net profit. Global Estimate: TL 3.319 mn revenues, TL 393 mn EBITDA and TL 288 mn net profit.
(=) TCELL is to release its 4Q19 earnings in 20th of February on Thursday. Research Turkey consensus: TL 6.600 mn revenues, TL 2.753 mn EBITDA and TL 739 mn net profit Global Estimate: TL 6.647 mn revenues, TL 2.879 mn EBITDA and TL 679 mn net profit.